Monthly Archives: August 2003

Regional Review: A healthy recovery

With steady, although sometimes slow, recovery following the Asian economic crisis, grain processing industries in ASEAN nations are beginning to vertically integrate and see new growth.

Cross-border investment flows within the feed, flour and oilseed industries in Southeast Asia testify to the success of ASEAN economic integration. And the commitment to the region from companies like Cargill and other multinationals points to good prospects for continued development of a modern grain processing industry.

Flour Milling

The production of wheat flour could be the most laissez-faire of all grain processing sectors in Southeast Asia. Import tariffs are minimal and there are few government subsidies for wheat-based products. In the Philippines and Indonesia, where rice production costs are relatively high, this policy has political significance, since wheat flour noodles provide a lower cost alternative to rice as a food staple. Ironically, prosperous Malaysia has subjected wheat flour prices to government controls for almost 30 years.

Despite, or in some cases because of, excess milling capacity in nearly every country, there is active trade in wheat flour in the region. Indonesia is the main importer of flour from within and outside ASEAN countries. An increasing level of shipments has led to the temporary imposition of 5% tariff on imported flour. This may only worsen the problem of smugglers, who are bringing in flour in small, hard-to-police water-bound shipments to the vast archipelago from underutilized mills in neighboring countries.

There are fewer and fewer countries where there is not an excess of flour milling capacity. ASEAN is no exception. In Indonesia it is estimated that the mills are operating at 50% to 70% of capacity. In the other major ASEAN economies, that figure is about the same. Vietnam is the one country where utilization rates may be higher, or at least where higher medium term demand is anticipated for wheat flour. This has made the country a focus of recent investment in the sector.

Singapore’s Interflour is building a first phase 300-tonne-per-day flour mill at the site of its new port grain handling facility in Vietnam’s Vung Tau Province. As the first Vietnamese flour mill located directly on a port, it is expected to have major competitive advantages. The landed costs of wheat arriving in vessels of up to 40,000 tonnes will be lower, and there will not be the expense of trucking wheat into congested Saigon where a number of mills are operating.

Vietnam is also host to other international milling ventures. Glowland Ltd. of Malaysia is the majority investor in a large mill in Vung Tau Province, with Australia’s AWB and the state-run Vietnam Food Industries as minority partners in the U.S.$25 million joint venture. Other components of Vietnam’s milling industry include a few state-run mills, and numerous small privately owned mills built in recent years, mostly using Chinese equipment.

Total milling capacity is only about 1 million tonnes per year, or just 12 kg of wheat per capita. If present trends in consumption and economic growth continue, it is quite likely the extra capacity will be used up and new mills will have to be built.

Thailand, where the demand for special flours used in cakes and pastries is most developed, has attracted Japan’s leading miller, Nisshin Seifun Group, to invest in the Nisshin-STC Flour Milling Co. Ltd.

In the Philippines, the regional brewing goliath San Miguel took a big step into the flour milling arena when it acquired Pure Foods Co. with more than 1,000 tonnes of daily capacity and separately bought Pacific Mills, whose capacity will be extended from 300 to 1,200 tonnes, according to reports. The new entrant will soon account for 20% to 25% of the Philippine milling capacity.

Founded in 1961 as of one of the first mills in Southeast Asia, Prima Mills in Singapore has sought expansion in flour milling by going outside the region. Its Trincomalee port complex in Sri Lanka has daily milling capacity of 3,400 tonnes of wheat. The company has also invested in two mills in Shandong province, China. There are a number of other ASEAN milling concerns with operations in more than one country.

Feed Milling

The Thai group Charoen Pokphand is the region’s giant and a global player when it comes to feed milling. Ranked among the top feed companies in the world, the CP Group operates mills in seven ASEAN countries and is the number one or two player in five of them, including Indonesia where it has a 50% market share. Its biggest growth has come in China where the company built 104 feed mills in the last two decades.

Charoen Popkhand began humbly 80 years ago as a feed trader. While feed milling remains the core business activity, the CP Group has sought growth in downstream investment in poultry, pork and aquaculture production. It has diversified into many other activities including telecommunications, petrochemicals and industrial products. Today it is one of Thailand’s most

important business groups and the largest homegrown multinational.

Within ASEAN, Thailand ranks first in commercial feed production with 8 million tonnes compared to 5.8 million in Indonesia and 3.8 million in Malaysia. The Gold Coin Group has a history of more than 40 years of feed milling beginning in Malaysia. It has strong brand recognition among farmers, and has operations in five ASEAN countries and operates more than 30 plants, including Sri Lanka and southern China.

A number of other ASEAN based companies have operations in more than one country. This includes the Indonesian company Japfa Comfeed, which divides the market in Myanmar with the CP Group. The presence of Cargill, which has feed operations in all of the larger ASEAN economies, and of Ralston in the Philippines and Thailand, sets a high standard for the local players. In the Philippines, brewers’ spent grains provided a natural entry for San Miguel into the feed industry. San Miguel Foods Inc. has 34% of the animal nutrition market producing 1.3 million tonnes of feed annually.

As with flour milling, the slow recovery from the 1997-98 Asian economic crisis has prevented a return to rapid growth in feed milling. Countering the regional trend is Vietnam, the one country where there has been an uninterrupted expansion in feed production. According to Dr. Suresh Chandran of the U.S. Grains Council’s regional office in Kuala Lumpur, Malaysia, on average one new feed mill has been opening monthly. Much of this has to do with strong economic growth and increased meat consumption as living standards improve. It also has to do with an aggressive policy to pursue pork exports.

The French fertilizer company SCPA entered into a feed joint venture in 1991 with five Vietnamese enterprises and now has a capacity of 400,000 tonnes per year in Dong Nai, making it one of the largest producers.

Much of the intense development in Vietnam’s feed and livestock production is concentrated in the region adjacent to the new grain handling port built in Vung Tau Province. Hog and poultry production is close both to the increasingly wealthy Saigon market as well as to export ports.

Strong demand in the feed industry in recent years has been a big boost to investment in flour milling, as bran sales have generated nearly as much revenue for the mills as flour. Nationwide there are at least 130 commercial feed operations according to the Vietnam Animal Feed Association.

Vietnam is also prominent in the segment of the feed industry that has seen the most rapid growth throughout ASEAN — aquafeed. Again the Mekong Delta area with abundant water resources, has been the focal point for this development. The Vietnamese industry is successfully making the switch to larger scale feed-based farming operations. Catfish, shrimp and prawns are the three main export products that are primarily exported to the U.S., the E.U. and Japan. The rapid development of seafood exports has even stimulated demand for flour, used both as a binder in feeds, and for breading of finished products.

Industry exports estimate that aquafeed production accounts for 5% to 7% of total feed production in the region. This may be small, but it is still significant especially when one takes into account higher profit margins on the many specialized feed types required by the continually expanding range of fresh and salt water creatures being farmed.

All of the larger feed mill companies in the region operate special plants for aquafeed. Gold Coin has five such plants. Thailand, as the region’s number one seafood exporter, has the most aquafeed plants.

The opportunities for increased use of grain in aquaculture are good. While grain based feed costs may seem expensive to the small family operation accustomed to using trash fish, larger and better-managed aquaculture enterprises fully understand the benefits of using balanced feed due to its results of higher conversion rates, faster growth, and more consistent product quality.

Oilseed Crushing

ASEAN is the world leader in production of palm oil, and so it can easily meet its own vegetable oil needs, with plenty left over for exports. However, the steady development of feed milling has resulted in a large demand for soy meal that cannot be met by local soybean production.

The outcome of this dichotomy has been development of a relatively modest oilseed crushing industry that fills the needs for higher quality oils used in food processing which cannot be met by palm oil.

In Thailand there are four medium-sized plants of 800 to 1,000 tonnes per day. In the Philippines three crushers, one Taiwanese-owned, fill the demand. Malaysia has two crushing plants that process imported soybeans, sunseeds or rapeseed.

Vietnam’s government has announced plans to promote more vegetable oil production and consumption, and is soliciting foreign investment.

The country’s first modern soybean crushing plant is under construction. There is already more than 400,000 tonnes of extraction capacity in the country relying 85% on the importation of palm kernels from Malaysia for raw material. Singapore’s Kuok Group has teamed up with local partner Vocarimex to build Vietnam’s first rice bran oil extraction plant in Can Tho Province at a cost of $7.6 million.

Wet Corn Milling

The region’s largest and most integrated wet corn milling plant began operations in April of this year. The Indonesian company PT Suba Indah built the plant with an annual capacity of 400,000 tonnes. It will supply starch, gluten, high fructose corn syrup, fiber and corn cooking oil to the entire region, using both locally produced and imported maize.

President of the company, Teddy Tjokrosaputro, reports his company is working with several world class players to supply raw materials and to increase production capacity. He continued, “in the long term we have a vision to develop starch derivative

products such as fuel ethanol and even corn fabric for clothing.”

The plant is located at Cigading port in Banten province. It is the largest bulk port in Indonesia and can handle up to cape size vessels and several panamaxes simultaneously.